The Obama administration released its annual budget proposal this morning (it’s late again). Unfortunately, the president didn’t use this extra time to find a way to put the country on a sustainable fiscal path. His plan is more of the same: more spending, more class-warfare tax proposals, and no real commitment to reform entitlement spending.
This budget, in fact, is supposed to mark the end of “austerity.” Certainly the budget deficit has been cut over the past few years, but contrary to what the president claims every time he talks about the issue, this isn’t evidence of fiscal responsibility.
First, it ignores that the deficit was at an all-time high before it dropped, thanks in part to President Bush, but also to Obama’s own spending initiatives (the deficit was $459 billion in FY 2008, $1.7 trillion in FY 2009, and $1.1 trillion in FY 2010). Second, the reduction happened against the president’s will since, as a good Keynesian, he wanted to jack up spending as often as possible. (It’s truly odd how he can be so proud of reducing the deficit when it goes against what we assume are his fundamental beliefs about fiscal policy.) Moreover, the deficit reduction will be short-lived, as the recent CBO report shows, and debt remains at an historically high level and on an unsustainable trajectory.
So how much does the president wants to spend? This budget calls for almost $4 trillion in spending for the fiscal year that begins October 1. As the chart below shows, in his first budget, which was without any irony called a “New Era of Fiscal Responsibility,” the president was hoping to spend $4 trillion by 2014, one year sooner than he’s just about going to get there.
That hope was crushed by a stubborn Congress and an American people insistent on some degree of fiscal responsibility, but the president isn’t giving up.
This year, he’ll explain that we need some government investments to jump start the economy — hence the added $56 billion in education spending and infrastructure. While “investing” in these things is a good idea, it would be more efficient to invest private money rather than government funds, and it has no chance of immediately growing the economy. The academic literature has shown that government spending can’t effectively stimulate growth in a high-debt environment — at our current debt levels, Keynesians shouldn’t expect any added growth from Obama’s spending.
There’s also ample academic evidence that higher debt slows economic growth. While there have been challenges to the landmark 2010 paper by Harvard University economists Carmen Reinhart and Ken Rogoff arguing that countries with debt/GDP ratios higher than 90 percent have notably lower economic growth, their fundamental claim has been supported by numerous studies, including papers by their critics, the European Central Bank, the International Monetary Fund, and the Bank for International Settlements.
Failing to address our debt and deficit levels today will result in burdening future generations with higher interest rates, lower growth, higher unemployment rates, and lower standards of living. Maintaining the current trajectory would mean the most massive transfer of wealth from younger taxpayers to the elderly in American history. It’s both unprecedented and unfair.
But don’t expect the president budget to do anything about that. Also, for all of his talking about helping the poor, don’t expect the president to reform programs like Social Security — which is currently projected to produce large cuts in Americans’ benefits. As I wrote in the Washington Examiner on Friday:
The president must know that the Social Security Trust Fund is set to dry out by 2033. When that happens, Social Security benefits will be cut by roughly 25 percent. The people hurt the most by the president’s unwillingness to reform the program today will be low-income seniors who rely on these benefits.
Is it that the president washes his hands of what happens to these people, because by 2033 he will be long gone from Washington? If that the case, I wonder why the president is also unwilling to put forward reform options for the Social Security Disability Insurance program? This program’s trust fund is set to dry out in the next two years.
The administration has announced that contrary to its previous budget, it will not even pursue chained CPI — a change that would more accurately measure general price inflation and also slightly reduces the growth rate of benefits. If it can’t commit to such a small change (one that I don’t support myself because of its tax implications), there is little hope that the president will ever tackle the looming Social Security insolvency.
I will have more during the day on the budget as the actual numbers come out.